By: Wilson
It’s now or never for the oil market. We have washed out sentiment to the point where either oil prices move violently higher, or any semblance of a normal market is thrown out the window.
On Friday, we had the most infamous signal in markets hit: The Economist.
Oh my...
To add more fuel to the fire, Brent positioning has completely washed out.
Exhibit A
Exhibit B
And on the fundamental side, these are the updated charts:
Brent vs 3-2-1 Crack Spread
Gasoline vs WTI
The gasoline vs WTI chart is so wild that I actually want to explain this.
In the history of the oil market, there’s only ever been one time where gasoline materially outperformed WTI, and the reversion ended the week after.
One week, that’s it. That was during COVID. And the outperformance was because WTI briefly went negative during April 2020.
Outside of this, there has never been a point in time when gasoline has outperformed WTI by this much.
Never.
So the week is gone. Done. And gasoline remains elevated. Gasoline spreads are saying to me that they are only going to go higher.
Gasoline isn’t going lower. It’s going higher, which means crude will have no choice but to go higher.
What about China?
Oh, China is buying. You will only see it after the fact. Positive refining margins sparked buying, but what we really need is public visibility into their buying. Sinopec needs to return in a way that shows China is back, so they need to play their game, get it over with, and show up visibly.
And you know what’s going to be funny about the Chinese buying? Similar to how no one could see the inventory draws on the way down, no one will see the inventory builds on the way up.
Black box in, black box out.
Oops, I guess that’s just how murky data works.
Real Talk
The Strait of Hormuz conflict is far from over. If you think about it from a game theory standpoint, it’s now or never for the Iranians.
Iran knows that if the US plays a war of attrition, it will lose 1,000 out of 1,000 times. You need the US to give up because of political pressure, and the easiest way to get that is through economic pressure.
We are now in the heart of the driving demand season. Global product inventories are low. SPR flow is running out. US commercial crude inventories are reaching levels at which US crude exports are shutting off. The rest of the world might have some barrels out of the Middle East that can last them through August or September, but what about after that?
What happens if China absorbs most of the barrels and there’s still 5 to 6 million b/d of production shut-in?
Most people seem to be paying attention only to what’s in front of them, not to what’s ahead. It’s like a man falling from a 40-story building, and you ask him if he’s ok on the 5th floor.
Yeah, he’s ok, but he’s not going to be in about 2 seconds.
We are not ok. If Iran contests the Oman route, that’s an estimated ~6 million b/d of flow that will be cut off. UAE, which saw exports surge to ~4 million b/d in June, will drop back to ~2 million b/d. The rest of the Middle East won’t be able to get the flows out in a manner that they like. Meanwhile, Iran will keep exporting its ~2 million b/d as if nothing happened.
But the US can never let that happen. The US can never let Iran control the Strait of Hormuz, because if it does, it will be able to hold the rest of the world hostage. So the only way out is through escalation, which is all but certain to make things worse before they get better.
That’s reality.
So yes, let sentiment reach rock bottom while the world experiences the largest production outage in history.
Let inventories decline further while Brent short positioning stays at all-time highs.
Sentiment is bombed out. It’s now or never.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of USO, UCO, BNO either through stock ownership, options, or other derivatives.
How are charts 2 and 3 regarding Brent positioning, labelled Exhibit A and B, not contradictory of each other? Can you add more specifics to those charts to explain why they’re different?